Eduardo Levy Yeyati, former Chief Economist at the Central Bank of Argentina and Head of Emerging Markets Strategy at Barclays Capital, is Director of Elypsis Partners, Professor at Universidad Torcuato Di Tella, and President of the Center for Public Policy (CIPPEC).

Argentina’s Warning to Would-Be Euro Deserters

BUENOS AIRES – The tensions between the eurozone’s north and south, and the complex and politically costly transfers of money required to dampen the euro crisis, have led many people to think the unthinkable: saving Europe’s common currency may require that some countries abandon it. Indeed, talk about exiting the euro has intensified, particularly in southern eurozone countries that desperately need to regain competitiveness. But a look at what exiting the euro might mean in practice should stop such talk cold.

Adopting a stronger currency (as in “euroization”) is neither difficult nor particularly unusual. Introducing a new, weaker national currency to substitute for a stronger one in times of financial distress is an altogether different matter, about which most economists know almost nothing.

The closest experiment along these lines is probably Argentina’s exit in 2002 from its dollar exchange-rate peg (embodied in its currency board) to a floating regime that depreciated the peso by 300% in the first three months.

Despite Argentina’s obvious differences from the eurozone’s troubled southern economies, the Argentine currency rollercoaster provides sobering lessons for European policymakers to ponder. Do Europeans want to return to their own version of a flexible “peso”? At the very least, European policymakers will need to be willing to (a) “pesify” contracts, (b) impose heavy restrictions on commercial banking operations, (c) restructure debts, and (d) introduce capital and exchange controls.

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